What is Total Expense Ratio (TER)?

Get a comprehensive understanding of Total Expense Ratio (TER) and its significance in mutual fund investments.
EXPLORE FUNDS
4 mins
04 Nov 2023

Mutual funds are a popular investment option for many investors in India. However, investing in mutual funds involves various costs. In this article, we will discuss what TER is and how it impacts mutual fund investments.

What is TER in mutual funds?

The Total Expense Ratio (TER) is the fee charged by Asset Management Companies (AMCs) to running and managing a mutual fund scheme. It includes all the expenses incurred by the AMC, such as fund management fees, marketing and distribution expenses, legal/audit costs, and other operating costs. The TER is expressed as an annual percentage of the assets under management (AUM) of the scheme.

Total expense ratio explained

The formula for calculating the expense ratio is as follows:

TER = (Total Costs Incurred / Total Net Assets) * 100


Here, Total Costs refer to all costs incurred by the AMC such as fund manager's fee, marketing and distribution expenses, legal/audit costs, etc. Total Net Assets represent the combined market worth of all the assets, such as stocks and bonds held by the fund on a specific date after deducting all liabilities.
For example, if an equity fund has an AUM of Rs. 600 crore and the expenses sum up to Rs. 12 crore, then the expense ratio formula would be (Rs. 12 crore / Rs. 600 crore) * 100 = 2%. So, 2% will be the total expense ratio.

Major costs that add up to TER in mutual funds

Here are some of the major components sof total expense ratio that you should know of:

  1. Management Fee: This constitutes a key component of the total expense ratio. In order to meet the cost of running an office, recruiting staff and managing funds, AMCs deduct this fee from the fund corpus. This is higher for active funds than passive funds.
  2. Distribution Fee: This fee is paid to distributors who sell mutual fund schemes to investors.
  3. Accounting fee: This includes expenses related to maintaining records and reports required by regulators.
  4. 12B-1 Charge: This fee is equivalent to the amount spent on advertising each investment fund. It is calculated as a percentage of the fund's net assets and is included in the fund's total cost ratio. The fee is also charged to new investors who allocate funds to the respective mutual fund.
  5. Brokerage Fee: This fee is paid to brokers who execute trades on behalf of mutual funds.
  6. All Other Operating Costs: These include legal fees, audit fees, custodian fees, registrar and transfer agent fees, trustee fees etc.

SEBI limit on TER in mutual funds

Here are the TER Effective from April 1, 2020:

Assets Under Management (AUM)

Maximum TER as a percentage of daily net assets

TER for Equity funds

TER for Debt funds

On the first Rs. 500 crore

2.25%

2.00%

On the next Rs. 250 crore

2.00%

1.75%

On the next Rs. 1,250 crore

1.75%

1.50%

On the next Rs. 3,000 crore

1.60%

1.35%

On the next Rs. 5,000 crore

1.50%

1.25%

On the next Rs. 40,000 crore

TER reduction of 0.05%
for every increase of Rs. 5,000 crore of
daily net assets or part thereof.

TER reduction of 0.05%
for every increase of Rs. 5,000 crore of
daily net assets or part thereof.

Above Rs. 50,000 crore

1.05%

0.80%


Mutual funds are now permitted to charge an additional 30 basis points (bps) if the new inflows from retail investors from beyond the top 30 cities (B30) are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year to date) of the scheme, whichever is higher. This is essentially to encourage inflows into mutual funds from tier-2 and tier-3 cities.

What is the Impact of TER in mutual funds on returns?

The TER can have a significant impact on your returns from mutual fund investments. A higher expense ratio means that a larger portion of your returns will be deducted as fees, thereby reducing your overall returns. On the other hand, a lower expense ratio can help you maximise your returns.

Conclusion

In conclusion, understanding the Total Expense Ratio (TER) is crucial when investing in mutual funds. It helps you identify the costs associated with investing in a particular scheme and its impact on your returns. By comparing TERs across different schemes and choosing those with lower ratios, you can maximise your returns from mutual fund investments.

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